Prorating costs

Family child care homes 

If you run your program from your home, many of your expenses are probably used for both your business and your personal life. Determining which expenses you can deduct from your taxes may seem complicated, but it's often simpler than it appears.

Home-based providers can use the Time/Space Calculation, which helps them determine how much of their expenses are for their business, and can then be deducted from their taxes. The Time/Space Calculation looks at how much space and time in your home is used for business. 

Child care centers 

If your business is a child care center that isn't located inside a larger business or group, it's easier to determine how much of your expenses are for your business. If your building is only a child care center, and you're not working as part of a larger organization, then all of your expenses for that location should be related to running your business.

Child care businesses within larger organizations 

If your child care business is a part of a larger enterprise, then only a portion of expenses may be allocated specifically to your business, like the YMCA or a local church. To determine the percentage of expenses that are associated with your business, you'll will need to prorate your business costs. 

Step 1: document actual costs that impacted your child care business

Expenses that are only for your child care business include things like supplies bought only for the program, salaries and costs for child care workers, protective gear and cleaning supplies for the center, and any items or services needed to run the program. Repair costs for areas only used by your child care program also count.

Maintain accurate business records to document all of these costs. If it's not a shared expense, count 100% of the cost as a business expense.

Step 2: document costs that are shared between your child care center and the rest of your facility

Figuring out shared expenses can be harder. To count, the expense must have affected your child care program in some way. The cost must be reasonable and needed to run the child care business. For example, you need electricity to run the business, so it's a shared expense. 

Other shared expenses include repairs to a parking lot used by both parents and church members. Fixing the church's altar wouldn't count, because it's not needed to run the child care business.

Repairs to areas shared by your child care program and other groups would count but repairs to an area not used by the program would not be a valid expense. For instance, say you're part of a YMCA with three locations, but only one has the child care center. Only the costs at the location with the child care center count. If the costs are for the whole building, not just the child care location, you must figure out the valid costs using one of the methods explained in the next section.

In the chart below, enter the total shared cost, leaving the percentage incurred by the child care business and total business cost empty for now:

Step 3: choose a method of proration

Determining which expenses are eligible business expenses requires choosing a method of proration. Stick with the method you choose to keep things consistent.

1. Percent of total square footage of facilities

Take the number of square feet of the space used for your child care program and divide it by the total square footage of your entire facility. To calculate square footage, you'll need to measure the length and width of your space.

Using a tape measure, fix a tape measure to one end of the longest wall in your space and extend it to the other end

• Record this measurement (in feet, not inches)
• Fix a tape measure to one end of the shortest wall in your space and extend it to the other end
• Record this measurement (in feet, not inches)
• Multiply the length measurement by the width measurement to find your square footage

For example, if your space is 12 feet long and 10 feet wide, your square footage would be 120 square feet.

For oddly shaped spaces, such as rooms with an extra nook or filled by a closet, break your room into smaller rectangular blocks, use the square footage calculation for each block, and add the totals together.

Once you have your totals, divide the square footage of your child care space by the square footage of your entire facility to find a percentage. For example, if you use 1,000 square feet of your facility for child care space, and the entire facility is 5,500 square feet, then you divide 1,000 by 5,500 to get 0.181. Multiply that number by 100 to get the percentage. This means that 18.1% of your overall expenses (such as utilities like electricity and maintenance, like the parking lot example from earlier) would be eligible.

2. Percentage of total revenue

When you prorate something, you're calculating an amount as a part of a whole. Another common method of proration is to calculate what percentage of your total revenue is made up by the revenue of your child care program. 

First, you need to calculate the total revenue for your entire facility. For example, if you're a child care program inside of a fitness center, calculate your total revenue from all of your programs, including the fitness center.

Calculate the revenue from your child care program only. Make sure you're using the same time period (typically your fiscal year) for both of these calculations.

Divide the revenue from your child care program by the total revenue for your entire facility. Once you have that figure, multiply it by 100 to get a percentage.

For example, if your child care program revenue is $25,000 and your total revenue is $200,000, divide $25,000 by $200,000. The result is 0.125. Multiply that number by 100 to get the percentage. This means that 12.5% of your overall expenses are eligible.

3. Percentage of total costs

You can calculate your allocable expenses by figuring out what percentage of your total costs are spent on your child care program. This is similar to calculating the percentage of total revenue, except that instead of calculating money in, you're calculating the amount of money out.

The first step is to figure out the costs for your entire operation. Include the costs attributed to your child care program in this figure.

Figure out the total cost for your child care program. This includes dedicated costs for the program (supplies, salaries, etc.) but not costs that are shared between the child care program and the entire operation. Think back to that parking lot example: the money spent on that should be included in the costs for the entire operation only, as you can’t double count costs. This can get confusing, so if you have a lot of shared costs, choosing another method of proration may be a better option.

Once you have both figures ready, divide the total costs of your child care program by the total costs of your overall business. Once you have that figure, multiply it by 100 to get a percentage.

Say you spend $15,000 on your child care program and $95,000 overall, you divide $15,000 by $95,000, and your result is 0.157. Multiply that number by 100 to get the percentage. That means that 15.7% of your overall expenses are eligible.

4. Apply proration percentage to expenses

Now that you’ve chosen a method of proration, apply your result to your costs to figure out your total allowable business expenses. For this example, we’ll use the figure we calculated in the previous section: 15.7%.

Enter your shared expense into the worksheet. Once your expenses are entered in your worksheet, you’ll need to enter the percentage incurred by your child care business (if it's NOT a shared expense, the percentage is 100%). If it's a shared expense, take the percentage that you calculated using your method of proration and enter it here. In this example, we are using 15.7%.

Divide the percentage by 100 to turn it into a decimal, and then multiply that decimal by the shared expense amount:

15.7 / 100 = 0.157

$2,000 x 0.157 = $314

In this case, the allowable business expense of the $2,000 utility bill is $314. Continue the same approach to your business costs, whether they are shared or not, and add them together to get your total business expenses.

Enter all business expenses, including shared costs as well as dedicated costs for your child care business only. Include costs for personnel, rent or mortgage, utilities, maintenance, and repairs, PPE and supplies, goods and services, and any other business costs. Make sure to mark shared costs. 

Enter the total amount paid toward that expense. If it's NOT a shared expense, the percentage is 100. If it's a shared expense, take the percentage that you calculated using your method of proration. 

Multiply the amount you paid toward each expense by the percentage that you calculated for your business to get the total business cost. 

Disclaimer

The information contained here is for educational purposes only and is not intended to constitute legal, tax, or financial advice.